Breakingviews - Joe Biden’s tax plan has a flaw: too many losers
NEW YORK (Reuters Breakingviews) - Joe Biden says he won’t slap new taxes on people who earn less than $400,000 a year if he becomes U.S. president. But if carried through, his tax plan could create losers among those who fall far short of that symbolic income threshold. That could be a problem when it comes to asking Congress to make the Democratic contender’s vision a reality.
The former vice president’s tax cannon is mostly pointed at the very rich. Biden wants to raise the top level of income tax, and remove the cap on the amount of salary on which taxes for social security have to be paid. In total, his measures could raise $2.4 trillion to $3.4 trillion over a decade, based on separate number-crunches from the Tax Foundation, American Enterprise Institute, Tax Policy Center and the Wharton School of the University of Pennsylvania – four think tanks that between them span the political aisle. All agree that his plan would raise proportionately more revenue from the wealthy than from everyday Americans.
There’s plenty in Biden’s proposal to get plutocrats hot under the collar, like charging capital gains tax on inherited assets, and raising the tax on investment profits to match that of income for the highest earners – which effectively closes the so-called carried interest loophole that benefits private equity executives. Biden also plans to raise the corporate income tax rate to 28%, from 21% today. It’s likely that would cause company profits and share prices to fall, just as they rose when President Donald Trump cut the rate from 35% in 2017.
But raising corporate taxes may affect even lower earners. One theory is that by making it less attractive to invest in companies, a higher tax rate over time reduces their output compared with what it would otherwise have been, resulting in less profit. The resulting pain falls partly on investors, but also on workers. Economists and the Treasury have, over the decades, disagreed over how that impact is parceled out. These days, the consensus is that between 20% and 25% is borne by employees.
Even though that sounds pretty abstract, it makes a difference. All of the four above-mentioned studies split Americans into equal-sized quintiles or deciles based on income. Under three of the four think tanks’ analyses, raising corporate taxes would mean all segments end up with lower average after-tax income by 2030. Penn Wharton finds only the top 10% will be penalized, but doesn’t carry that analysis out past 2021. Even then, the gains for the bottom 20% of Americans in 2021 are just $155 a year.
In the real world, tax is only one of the things that will affect the economy and wages. Biden also plans to spend on things like education and infrastructure, which have a big impact on people’s lives and livelihoods. So under his plans, lower earners may well, in the round, be better off – and so might society overall. The tax think tanks generally don’t factor in spending, but credit-ratings agency Moody’s does, and concludes that in Biden’s America, and with a Democratic Congress, GDP might grow 2.9% a year on average from 2020 to 2030, compared with 2.4% under Trump and a Republican legislature.
But taxing and spending are different things, and Congress would – and should – weigh them up separately. After all, if the former vice president were happy to run giant deficits, and isn’t worried about inflation, he could spend as much as he likes without raising any new tax revenue at all. And even if Democrats sweep all branches of the government and executive, there will be some lawmakers who support the plans to spend but not the plans to pay for it – or vice versa.
Biden could therefore face a problem if he comes to present his tax plans to lawmakers. Considered alone, they don’t deliver a big dividend for most Americans, and a lot of rich people will want to water them down. The cost to the top 0.1%, according to Penn Wharton, would be $1.3 million each in the first year after legislation was passed. In other words, that’s how much it would be worth the richest spending to stop the Democrat’s progressive ideas from getting off the ground. With that kind of opposition, Biden’s plan may look different by the time it becomes reality.
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